Spain Is Not Greece and Need Not Be Ireland
PIMCO
By Mohamed A. El-Erian
February 3, 2011
Spain is an important battleground when it comes to the success of efforts to stabilise the debt crisis in Europe’s periphery and to limit the contamination of the region’s core. To win this battle, the Spanish authorities must move quickly to restructure their cajas (unlisted regional savings banks) and do so without further destabilising their public finances.
Spain’s success is of acute relevance to the rest of the eurozone. If Spain is not successful, Europe’s existing rescue mechanisms and approach would be overwhelmed, raising doubt on the sustainability of the eurozone’s weaker countries (such as Greece, Ireland and Portugal). It would also lead to renewed pressures on the value of the euro, on German interest rates, and on the credibility and integrity of the European Central Bank.
First, the good news. Unlike Greece, Spain does not have a direct public finance crisis. At just over 60 per cent of gross domestic product (compared with double that level in Greece), the public debt stock is much more manageable. Indeed, on the basis of just its public finances, Spain does not face a debt overhang that is sufficient to undermine growth dynamics and torpedo sovereign debt spreads.
The challenge to Spain’s budget deficit and debt comes not from direct indebtedness but, instead, from “contingent liabilities” – that is to say, the liabilities of other sectors that the government may decide to assume in order to curtail further economic and financial disruptions.
Spain is where Ireland was a couple of years ago. In the next few weeks, it has to choose whether to use the government’s balance sheet to recapitalise the cajas’ struggling balance sheets and whether to assumes their losses. Moreover, the cajas are not the only sector facing debt overhangs in Spain and, consequently, posing contingent liabilities for public finances. Property is also a concern, as are some segments of the private sector.
The Irish government decided to use its balance sheet to absorb the bulk of the losses of its private banks. Taxpayers were put on the line for past bank excesses, while most creditors and all depositors were let off the hook.
Ireland’s decision was driven by the judgment that a broader burden-sharing, including imposing haircuts on more creditors, would be highly disruptive. In reality, no one can ever know the counterfactual.
What is clear is that, at an estimated 30 per cent of GDP, the burden from the bank rescue efforts has proved excessive for Ireland’s public finances. The banks’ problems have now totally overwhelmed budgetary resources, turning a banking crisis into a full-blown sovereign debt crisis. As a result, the country now depends on bail-out funds from the International Monetary Fund and its European partners.
Spain is clearly keen to avoid Ireland’s experience. The central bank is forcing reform on the cajas, and pushing them hard to recapitalise. And some cajas, like Catalonia’s Caixa, are actually making concrete and meaningful efforts to raise private capital.
These are important steps. But they are just a start: the cajas have dug themselves into a deep hole. Estimates for the sector’s capital needs vary enormously. Reflecting the still-large degree of valuation uncertainties, some are as low as €20bn ($27.6bn) while others are as high as €100bn. Moreover, the cajas still account for an important part of deposits whose stabilisation is key to Spain’s well-being.
If it continues to move forcefully, Spain has the ability to avoid Ireland’s unfortunate situation. But this is far from certain; and it is not automatic. To avoid a bad outcome in Spain (and the rest of the eurozone), additional, significant and highly visible progress needs to be made within the next few weeks to pump capital into the cajas, aggressively dispose of assets, and strengthen them institutionally, including through mergers for some.
Egypt
Franklin Templeton
By Mark Mobius
February 3, 2011
Background: Widespread protests have been ongoing in Egypt since Tuesday, January 25, 2011. Sparked by the protests in Tunisia, now known as the “Jasmine Revolution,” the demonstrations in Egypt were initially focused on the perceived unfair parliamentary elections held in November 2010, and have subsequently expanded rapidly in size and scale, with many demanding the resignation of President Hosni Mubarak and a complete change of the National Democratic Party (NDP) regime. While the overall thrust of the demonstrations was peaceful, they have recently become turbulent with some incidents of violence such as the torching of the NDP party headquarters and more recently with clashes between protestors and those supporting the current government. The deployment of the army initially restored security somewhat, as the military is well liked and respected by most Egyptians. Importantly, the army has so far refused to engage with protestors but still managed to protect key political assets.
Government Response: In response to the protests, last weekend President Mubarak dissolved his cabinet and made two notable appointments—Ahmed Shafiq as prime minister and Omar Suleiman as vice president. Mr. Shafiq, previous civil aviation minister and former head of the air force, is respected by the Egyptian elite, even among the political opposition. He is viewed as a moderate with strong business credentials and a military background, and he has been credited with the turnaround of EgyptAir. Mr. Suleiman, former head of military intelligence, led Egypt’s efforts in securing an Israeli-Palestinian peace deal and mediated an inter-Palestinian reconciliation.
Nominating Mr. Suleiman as vice president represents a first step taken by Mr. Mubarak toward laying the foundation for a succession plan to his 30 years of presidential rule. The appointments are not only seen as the first step in the process to end Mr. Mubarak’s presidency but also signal a shift toward a more liberal political system. Mr. Mubarak also stressed the need for political reform and promised that his new government would control inflation, maintain subsidies, fight corruption and create jobs. Meanwhile, the speaker of the Egyptian parliament indicated that an investigation would be launched into the legality of last November’s parliamentary elections.
Reaction from Protestors and the International Community: Mr. Mubarak’s announcements fell short of the expectations of protestors, who saw his appointments as a nominal gesture and a change of figurehead rather than a change of regime. The protestors seem to want to choose their own leader, and they are unlikely to accept a close ally of the president, appointed by the president. Increasingly, other international leaders have been calling upon Egypt to reaffirm the presidential elections scheduled for September 2011 and for Mr. Mubarak not to seek another term—this latter concession was made by Mr. Mubarak on Tuesday, February 1. That said, Mr. Mubarak’s role in steering the country through an orderly transition of power remains vital but uncertain.
Possible Outcomes: The political developments in Egypt have reached a crucial point likely to result in substantial change in the political landscape. If Mr. Suleiman were to take power and if he wishes to be accepted by the Egyptian people at large, he would need to position himself as a leader of the transitional cabinet and may need to distance himself from Mr. Mubarak and the old regime. Prior to the forthcoming September 2011 elections, there will likely need to be changes in the Constitution to allow non-NDP members to run in presidential elections followed by a dissolution of the parliament. In addition, we may see further broad-based measures undertaken to try to strengthen economic and political institutions.
Since the protestors do not seem to be united under one leader or common agenda, we think it is very unlikely that escalating protests on a massive scale will culminate in the replacement of the president and vice president by an interim military government. We also think it is extremely unlikely that the demonstrations will end in a violent standoff between the protestors and the army, given Egyptians’ long-standing respect for the military. While demonstrations and volatility may continue in the short term, we believe that Egyptians realize change is coming, and we believe they are willing to work towards lasting change rather than risk a complete lack of security in the short term.
Impact on Markets and Our Investments: Stock markets in Egypt have been closed since January 30 and those in the Middle East/North Africa (MENA) region declined substantially between January 25 and February 1 as sentiment among some investors turned negative amid the political uncertainty. Other investors have been seeking an opportunity to buy stocks at low prices. The geopolitical ramifications of this unrest are many, not only for Egypt but also potentially for the rest of the world, and for the most part will probably be positive since political reform has been long overdue in the region.
We continue to monitor the situation carefully, with regular updates from our analysts on the ground, and examine opportunities as they arise.
Regime Change: A Global Domino Effect?
Guild Investment Management
By Monty Guild and Tony Danaher
February 3, 2011
Tunisia.
Now Egypt.
The cabinet fired in Jordan.
Who is next and where?
Nobody can say for sure, but there are no shortages of possibilities, both inside and outside the Arab world. We see change unfolding and accelerating during the next two years. In addition to Tunisia, Egypt, and Jordan, civil uprisings have also occurred in Morocco, Algeria, Albania, and Yemen.
Often repressed, voiceless, and jobless, public masses are rising in protest against entrenched governments that are corrupt and out of touch with their people. These upheavals are the start of something big, a global tidal wave of anger that will sweep away ruling classes. In this dawn of a season of discontent, generals and presidents-for-life, and all their got-fat-cronies, will be well-advised to prepare departure plans and ensure the safety of the foreign bank accounts they have likely filled with state money and bribes over the years.
This wave of change will shake the world, a political earthquake of a magnitude perhaps equivalent to, or even greater than, the fall of the Soviet Union and its communist satellite states in the late 1980s. Non-democratic institutions all over the world will be vulnerable as the masses rise up in demand of greater individual freedom and more public representation within the political, social, economic, and educational segments of society. Even in democracies, the public will surely make sure its voice is heard. India, for example, is the world’s largest democracy. But corruption thrives at the very molecular level of government, education, business, and military, and the public has begun pressuring leaders for change.
Causes of Public Unrest
There are plenty.
Rising food prices; high unemployment among the poor; large populations of restless young; a lack of jobs for the educated; government repression; corruption; the all-too-common rigging of elections; police abuses; and the majority of the population with believing they have no voice. The list goes on and on.
Corruption and autocracy can be tolerated when the common man has a job and some expectations that he can better himself in the long run; but what happens when he faces a declining standard of living? Does he revolt? Does he throw out the oligarch or dictators who are getting rich on national resources or using political power to maximize their income while cutting off the common man from progress? The answer may soon be evident.
Technology Involvement
The speed of this revolutionary change fascinates us. Never before in history has there been such facility for information flow. We live in an Internet age of instant communication, an electronic hundredth monkey effect borne on the wings of cellular phones and cameras, texting and tweeting, Wi-Fi, iPhones, Androids, and YouTube. Images and messages can be transmitted into the nooks and crannies of all societies, stirring the masses, creating larger ripples in shorter time periods. Information is knowledge, and information today is empowered, magnified, and shared to a level never before possible. And right now, because of technology, the common man is less likely to be alone in his revolt.
The spread of discontent, anger, and outcry has been further stoked lately by WikiLeaks. Details of corruption, shady, self-serving dealings, and meddling in the affairs of other states have been pushed out of the classified closet into the open, often embarrassing the powers-that-are. WikiLeaks and other such Internet whistle-blowing vehicles have opened a whole new industry and the prospects of an endless stream of secret revelations.
We are seeing a quantum leap in the power and sweep of communication and information flow. We saw something similar more than two decades ago when the Communist rulers of Eastern Europe, with all their police state muscle, were unable to deter the influx and spread of ideas, visions of possibilities, and above all, the truth, flowing into their countries via Western television and radio programming. The Workers Paradise Propaganda was no longer a match for what people could see for themselves: an affluent, free world. So Eastern Europeans began to “vote with their feet,” leave for the more affluent West, if possible, and march in the streets. To be sure, some elements of Soviet-style statism and repression remain, but much is gone, including those Communist governments.
Today, communication technology has become a political weapon: a weapon of mass destruction threatening the very power base of despots, and for the common man, a weapon of hope and opportunity.
Investment Repercussions
The fallout from global political upheaval around the world will likely bring palpable benefits for the common man. We expect to see a spreading and redistributing of wealth. New groups will share in the benefits that current power groups have been keeping for themselves. These are profound, fast-moving changes and will create investment opportunities that we can’t yet imagine.
Here is a rundown of initial expectations:
The Positive
The events support all of the sectors we have recommended in the past weeks. In particular, the positive influence is growing stronger for oil, gold, silver, grains and other foods, machinery companies that produce food, oil production or mining equipment, and communication technology companies.
As investors seek stability, we expect to see money flow to the bigger, more liquid countries in Europe, and to the U.S. Capital will flow from unstable nations, industries and companies to more stable environments.
During the coming time of change, some quality investments may be ignored by investors seeking safety, even if they are in a country and industry which is attractive. The positive is that investors who are holding enough cash are well-positioned to capitalize on these opportunities.
The sectors which are hurt by turmoil are those industries in the countries with autocratic governments. We suggest that investors raise cash to be able to take advantage of any stock price corrections. Some countries will lose investment capital simply because of the instability. Over the long-run, more stable countries will see that capital move into their markets.
The Negative
In general, we envision only a short-term negative for emerging markets. Obviously, it is both short and long-term negative for markets in countries which have autocratic and non-representative governments such as Iran, Pakistan, and other parts of the Arab world, as well as Venezuela, Bolivia, Mexico, and some eastern European nations.
Global Inflation Rising — Here’s Why We Expect it to Continue
The last 6 to 12 months have seen inflation ramping up in much of the world. Here are the drivers as we see them:
1. The velocity of money is finally picking up. Think of this as an accelerator and multiplier of commercial activity. As velocity increases, it stimulates growth and demand for products and services. A huge amount of money has been created, the result of QE1 and QE2 in the U.S., QE in Europe, continuing currency manipulation in Japan, and QE activity in many developing nations that are printing their own currency to buy U.S. dollars and thus forcing their currencies down so they can export more.
The banking systems in the U.S. and Europe have survived the first of their financial crises, and are at the stage of lending more to business and to individuals. This is increasing the speed at which money moves through the economy, and where we speak of more rapid velocity of money. When this process acts upon the massive amount of money that has been created in the U.S. over the last 2 years, it will send wave after wave of inflation through the developed and developing worlds alike.
2. Developed world economies are strengthening, led by better exports and demand for manufacturing equipment in places like China, India, and Brazil. Big U.S., European, and Japanese companies respond to strong business trends by spending money to grow. They will build new factories. They will stockpile raw materials. They will buy more manufacturing equipment.
This cycle of increased demand for raw materials and equipment will exacerbate cost-push inflation worldwide. The developing world has already been experiencing demand-pull inflation as the public increases its appetite for more cars, machines, better food, consumer goods, technology products, and infrastructure.
Our Recommendations — In Review
We are bullish for commodities, stock markets, and for income-earning real estate. It will be most felt in those countries where governments are stable and where the political process is somewhat representative of the opinions of the populace as a whole. For stock investments throughout the world, we base our recommendations on careful study of individual companies and industries, always keeping in mind that companies and sectors are at differing stages of growth. We recommend continuing to hold shares of growing companies in Canada, South Korea, and the U.S. We favor technology, metals, auto and auto-related, agriculture-related, and energy, including oil and coal.
Since September 9, 2010, we have been bullish on the U.S. stock market and will continue to be so. Over the longer-term, liquidity formation through QE will create demand for many assets, including American stocks. We are not removing our buy rating and in fact we continue to own many fast-growing, export-oriented U.S. stocks; we are saying that it is reasonable to expect a correction of 4-10 % in the U.S. market at any time.
U.S. Bonds
Bearish still. We do not recommend them as a safe haven.
Developed Countries — U.S., Canada, Australia and Europe
Technology, precious metals, and commodity-producers (food, oil, iron ore, and other base metals) will all benefit from an improving economy and a slowly improving back-to-work trend.
Commodities
Headed for higher ground, pushed by expanding liquidity and the oncoming inflation, already a growing problem in much of Asia and Latin America, and coming to the U.S. and Europe later in 2011 and 2012. Our favorite commodities are coal, oil, and food grains. Investors can trade copper and uranium for a few more months.
Precious Metals
The correction in gold and silver is about over. Upward global inflation, along with current instability and the potential for more in the future, adds additional allure for gold and silver. Various precious metals, including platinum group metals, may also rise, but gold and silver are our most favored choices. We are buying on the dips, large or small, adding to our holdings. Now might be a good time to establish a stake.
Oil
The correction in oil is drawing to an end. Oil remains attractive thanks to demand from emerging countries as well as the newly vibrant developed world economies. This collective demand for new oil exceeds the rate of discovery. Oil also serves as an inflation hedge. Dips, whether large or small, is a signal for us to add to our holdings. If you have no positions, now might be a time to get in.
Colombia
Due to a strike of truck drivers and a rising tide of labor unrest we are taking profits on half of our recommendation in Columbia.
PIMCO
By Mohamed A. El-Erian
February 3, 2011
Spain is an important battleground when it comes to the success of efforts to stabilise the debt crisis in Europe’s periphery and to limit the contamination of the region’s core. To win this battle, the Spanish authorities must move quickly to restructure their cajas (unlisted regional savings banks) and do so without further destabilising their public finances.
Spain’s success is of acute relevance to the rest of the eurozone. If Spain is not successful, Europe’s existing rescue mechanisms and approach would be overwhelmed, raising doubt on the sustainability of the eurozone’s weaker countries (such as Greece, Ireland and Portugal). It would also lead to renewed pressures on the value of the euro, on German interest rates, and on the credibility and integrity of the European Central Bank.
First, the good news. Unlike Greece, Spain does not have a direct public finance crisis. At just over 60 per cent of gross domestic product (compared with double that level in Greece), the public debt stock is much more manageable. Indeed, on the basis of just its public finances, Spain does not face a debt overhang that is sufficient to undermine growth dynamics and torpedo sovereign debt spreads.
The challenge to Spain’s budget deficit and debt comes not from direct indebtedness but, instead, from “contingent liabilities” – that is to say, the liabilities of other sectors that the government may decide to assume in order to curtail further economic and financial disruptions.
Spain is where Ireland was a couple of years ago. In the next few weeks, it has to choose whether to use the government’s balance sheet to recapitalise the cajas’ struggling balance sheets and whether to assumes their losses. Moreover, the cajas are not the only sector facing debt overhangs in Spain and, consequently, posing contingent liabilities for public finances. Property is also a concern, as are some segments of the private sector.
The Irish government decided to use its balance sheet to absorb the bulk of the losses of its private banks. Taxpayers were put on the line for past bank excesses, while most creditors and all depositors were let off the hook.
Ireland’s decision was driven by the judgment that a broader burden-sharing, including imposing haircuts on more creditors, would be highly disruptive. In reality, no one can ever know the counterfactual.
What is clear is that, at an estimated 30 per cent of GDP, the burden from the bank rescue efforts has proved excessive for Ireland’s public finances. The banks’ problems have now totally overwhelmed budgetary resources, turning a banking crisis into a full-blown sovereign debt crisis. As a result, the country now depends on bail-out funds from the International Monetary Fund and its European partners.
Spain is clearly keen to avoid Ireland’s experience. The central bank is forcing reform on the cajas, and pushing them hard to recapitalise. And some cajas, like Catalonia’s Caixa, are actually making concrete and meaningful efforts to raise private capital.
These are important steps. But they are just a start: the cajas have dug themselves into a deep hole. Estimates for the sector’s capital needs vary enormously. Reflecting the still-large degree of valuation uncertainties, some are as low as €20bn ($27.6bn) while others are as high as €100bn. Moreover, the cajas still account for an important part of deposits whose stabilisation is key to Spain’s well-being.
If it continues to move forcefully, Spain has the ability to avoid Ireland’s unfortunate situation. But this is far from certain; and it is not automatic. To avoid a bad outcome in Spain (and the rest of the eurozone), additional, significant and highly visible progress needs to be made within the next few weeks to pump capital into the cajas, aggressively dispose of assets, and strengthen them institutionally, including through mergers for some.
Egypt
Franklin Templeton
By Mark Mobius
February 3, 2011
Background: Widespread protests have been ongoing in Egypt since Tuesday, January 25, 2011. Sparked by the protests in Tunisia, now known as the “Jasmine Revolution,” the demonstrations in Egypt were initially focused on the perceived unfair parliamentary elections held in November 2010, and have subsequently expanded rapidly in size and scale, with many demanding the resignation of President Hosni Mubarak and a complete change of the National Democratic Party (NDP) regime. While the overall thrust of the demonstrations was peaceful, they have recently become turbulent with some incidents of violence such as the torching of the NDP party headquarters and more recently with clashes between protestors and those supporting the current government. The deployment of the army initially restored security somewhat, as the military is well liked and respected by most Egyptians. Importantly, the army has so far refused to engage with protestors but still managed to protect key political assets.
Government Response: In response to the protests, last weekend President Mubarak dissolved his cabinet and made two notable appointments—Ahmed Shafiq as prime minister and Omar Suleiman as vice president. Mr. Shafiq, previous civil aviation minister and former head of the air force, is respected by the Egyptian elite, even among the political opposition. He is viewed as a moderate with strong business credentials and a military background, and he has been credited with the turnaround of EgyptAir. Mr. Suleiman, former head of military intelligence, led Egypt’s efforts in securing an Israeli-Palestinian peace deal and mediated an inter-Palestinian reconciliation.
Nominating Mr. Suleiman as vice president represents a first step taken by Mr. Mubarak toward laying the foundation for a succession plan to his 30 years of presidential rule. The appointments are not only seen as the first step in the process to end Mr. Mubarak’s presidency but also signal a shift toward a more liberal political system. Mr. Mubarak also stressed the need for political reform and promised that his new government would control inflation, maintain subsidies, fight corruption and create jobs. Meanwhile, the speaker of the Egyptian parliament indicated that an investigation would be launched into the legality of last November’s parliamentary elections.
Reaction from Protestors and the International Community: Mr. Mubarak’s announcements fell short of the expectations of protestors, who saw his appointments as a nominal gesture and a change of figurehead rather than a change of regime. The protestors seem to want to choose their own leader, and they are unlikely to accept a close ally of the president, appointed by the president. Increasingly, other international leaders have been calling upon Egypt to reaffirm the presidential elections scheduled for September 2011 and for Mr. Mubarak not to seek another term—this latter concession was made by Mr. Mubarak on Tuesday, February 1. That said, Mr. Mubarak’s role in steering the country through an orderly transition of power remains vital but uncertain.
Possible Outcomes: The political developments in Egypt have reached a crucial point likely to result in substantial change in the political landscape. If Mr. Suleiman were to take power and if he wishes to be accepted by the Egyptian people at large, he would need to position himself as a leader of the transitional cabinet and may need to distance himself from Mr. Mubarak and the old regime. Prior to the forthcoming September 2011 elections, there will likely need to be changes in the Constitution to allow non-NDP members to run in presidential elections followed by a dissolution of the parliament. In addition, we may see further broad-based measures undertaken to try to strengthen economic and political institutions.
Since the protestors do not seem to be united under one leader or common agenda, we think it is very unlikely that escalating protests on a massive scale will culminate in the replacement of the president and vice president by an interim military government. We also think it is extremely unlikely that the demonstrations will end in a violent standoff between the protestors and the army, given Egyptians’ long-standing respect for the military. While demonstrations and volatility may continue in the short term, we believe that Egyptians realize change is coming, and we believe they are willing to work towards lasting change rather than risk a complete lack of security in the short term.
Impact on Markets and Our Investments: Stock markets in Egypt have been closed since January 30 and those in the Middle East/North Africa (MENA) region declined substantially between January 25 and February 1 as sentiment among some investors turned negative amid the political uncertainty. Other investors have been seeking an opportunity to buy stocks at low prices. The geopolitical ramifications of this unrest are many, not only for Egypt but also potentially for the rest of the world, and for the most part will probably be positive since political reform has been long overdue in the region.
We continue to monitor the situation carefully, with regular updates from our analysts on the ground, and examine opportunities as they arise.
Regime Change: A Global Domino Effect?
Guild Investment Management
By Monty Guild and Tony Danaher
February 3, 2011
Tunisia.
Now Egypt.
The cabinet fired in Jordan.
Who is next and where?
Nobody can say for sure, but there are no shortages of possibilities, both inside and outside the Arab world. We see change unfolding and accelerating during the next two years. In addition to Tunisia, Egypt, and Jordan, civil uprisings have also occurred in Morocco, Algeria, Albania, and Yemen.
Often repressed, voiceless, and jobless, public masses are rising in protest against entrenched governments that are corrupt and out of touch with their people. These upheavals are the start of something big, a global tidal wave of anger that will sweep away ruling classes. In this dawn of a season of discontent, generals and presidents-for-life, and all their got-fat-cronies, will be well-advised to prepare departure plans and ensure the safety of the foreign bank accounts they have likely filled with state money and bribes over the years.
This wave of change will shake the world, a political earthquake of a magnitude perhaps equivalent to, or even greater than, the fall of the Soviet Union and its communist satellite states in the late 1980s. Non-democratic institutions all over the world will be vulnerable as the masses rise up in demand of greater individual freedom and more public representation within the political, social, economic, and educational segments of society. Even in democracies, the public will surely make sure its voice is heard. India, for example, is the world’s largest democracy. But corruption thrives at the very molecular level of government, education, business, and military, and the public has begun pressuring leaders for change.
Causes of Public Unrest
There are plenty.
Rising food prices; high unemployment among the poor; large populations of restless young; a lack of jobs for the educated; government repression; corruption; the all-too-common rigging of elections; police abuses; and the majority of the population with believing they have no voice. The list goes on and on.
Corruption and autocracy can be tolerated when the common man has a job and some expectations that he can better himself in the long run; but what happens when he faces a declining standard of living? Does he revolt? Does he throw out the oligarch or dictators who are getting rich on national resources or using political power to maximize their income while cutting off the common man from progress? The answer may soon be evident.
Technology Involvement
The speed of this revolutionary change fascinates us. Never before in history has there been such facility for information flow. We live in an Internet age of instant communication, an electronic hundredth monkey effect borne on the wings of cellular phones and cameras, texting and tweeting, Wi-Fi, iPhones, Androids, and YouTube. Images and messages can be transmitted into the nooks and crannies of all societies, stirring the masses, creating larger ripples in shorter time periods. Information is knowledge, and information today is empowered, magnified, and shared to a level never before possible. And right now, because of technology, the common man is less likely to be alone in his revolt.
The spread of discontent, anger, and outcry has been further stoked lately by WikiLeaks. Details of corruption, shady, self-serving dealings, and meddling in the affairs of other states have been pushed out of the classified closet into the open, often embarrassing the powers-that-are. WikiLeaks and other such Internet whistle-blowing vehicles have opened a whole new industry and the prospects of an endless stream of secret revelations.
We are seeing a quantum leap in the power and sweep of communication and information flow. We saw something similar more than two decades ago when the Communist rulers of Eastern Europe, with all their police state muscle, were unable to deter the influx and spread of ideas, visions of possibilities, and above all, the truth, flowing into their countries via Western television and radio programming. The Workers Paradise Propaganda was no longer a match for what people could see for themselves: an affluent, free world. So Eastern Europeans began to “vote with their feet,” leave for the more affluent West, if possible, and march in the streets. To be sure, some elements of Soviet-style statism and repression remain, but much is gone, including those Communist governments.
Today, communication technology has become a political weapon: a weapon of mass destruction threatening the very power base of despots, and for the common man, a weapon of hope and opportunity.
Investment Repercussions
The fallout from global political upheaval around the world will likely bring palpable benefits for the common man. We expect to see a spreading and redistributing of wealth. New groups will share in the benefits that current power groups have been keeping for themselves. These are profound, fast-moving changes and will create investment opportunities that we can’t yet imagine.
Here is a rundown of initial expectations:
The Positive
The events support all of the sectors we have recommended in the past weeks. In particular, the positive influence is growing stronger for oil, gold, silver, grains and other foods, machinery companies that produce food, oil production or mining equipment, and communication technology companies.
As investors seek stability, we expect to see money flow to the bigger, more liquid countries in Europe, and to the U.S. Capital will flow from unstable nations, industries and companies to more stable environments.
During the coming time of change, some quality investments may be ignored by investors seeking safety, even if they are in a country and industry which is attractive. The positive is that investors who are holding enough cash are well-positioned to capitalize on these opportunities.
The sectors which are hurt by turmoil are those industries in the countries with autocratic governments. We suggest that investors raise cash to be able to take advantage of any stock price corrections. Some countries will lose investment capital simply because of the instability. Over the long-run, more stable countries will see that capital move into their markets.
The Negative
In general, we envision only a short-term negative for emerging markets. Obviously, it is both short and long-term negative for markets in countries which have autocratic and non-representative governments such as Iran, Pakistan, and other parts of the Arab world, as well as Venezuela, Bolivia, Mexico, and some eastern European nations.
Global Inflation Rising — Here’s Why We Expect it to Continue
The last 6 to 12 months have seen inflation ramping up in much of the world. Here are the drivers as we see them:
1. The velocity of money is finally picking up. Think of this as an accelerator and multiplier of commercial activity. As velocity increases, it stimulates growth and demand for products and services. A huge amount of money has been created, the result of QE1 and QE2 in the U.S., QE in Europe, continuing currency manipulation in Japan, and QE activity in many developing nations that are printing their own currency to buy U.S. dollars and thus forcing their currencies down so they can export more.
The banking systems in the U.S. and Europe have survived the first of their financial crises, and are at the stage of lending more to business and to individuals. This is increasing the speed at which money moves through the economy, and where we speak of more rapid velocity of money. When this process acts upon the massive amount of money that has been created in the U.S. over the last 2 years, it will send wave after wave of inflation through the developed and developing worlds alike.
2. Developed world economies are strengthening, led by better exports and demand for manufacturing equipment in places like China, India, and Brazil. Big U.S., European, and Japanese companies respond to strong business trends by spending money to grow. They will build new factories. They will stockpile raw materials. They will buy more manufacturing equipment.
This cycle of increased demand for raw materials and equipment will exacerbate cost-push inflation worldwide. The developing world has already been experiencing demand-pull inflation as the public increases its appetite for more cars, machines, better food, consumer goods, technology products, and infrastructure.
Our Recommendations — In Review
We are bullish for commodities, stock markets, and for income-earning real estate. It will be most felt in those countries where governments are stable and where the political process is somewhat representative of the opinions of the populace as a whole. For stock investments throughout the world, we base our recommendations on careful study of individual companies and industries, always keeping in mind that companies and sectors are at differing stages of growth. We recommend continuing to hold shares of growing companies in Canada, South Korea, and the U.S. We favor technology, metals, auto and auto-related, agriculture-related, and energy, including oil and coal.
Since September 9, 2010, we have been bullish on the U.S. stock market and will continue to be so. Over the longer-term, liquidity formation through QE will create demand for many assets, including American stocks. We are not removing our buy rating and in fact we continue to own many fast-growing, export-oriented U.S. stocks; we are saying that it is reasonable to expect a correction of 4-10 % in the U.S. market at any time.
U.S. Bonds
Bearish still. We do not recommend them as a safe haven.
Developed Countries — U.S., Canada, Australia and Europe
Technology, precious metals, and commodity-producers (food, oil, iron ore, and other base metals) will all benefit from an improving economy and a slowly improving back-to-work trend.
Commodities
Headed for higher ground, pushed by expanding liquidity and the oncoming inflation, already a growing problem in much of Asia and Latin America, and coming to the U.S. and Europe later in 2011 and 2012. Our favorite commodities are coal, oil, and food grains. Investors can trade copper and uranium for a few more months.
Precious Metals
The correction in gold and silver is about over. Upward global inflation, along with current instability and the potential for more in the future, adds additional allure for gold and silver. Various precious metals, including platinum group metals, may also rise, but gold and silver are our most favored choices. We are buying on the dips, large or small, adding to our holdings. Now might be a good time to establish a stake.
Oil
The correction in oil is drawing to an end. Oil remains attractive thanks to demand from emerging countries as well as the newly vibrant developed world economies. This collective demand for new oil exceeds the rate of discovery. Oil also serves as an inflation hedge. Dips, whether large or small, is a signal for us to add to our holdings. If you have no positions, now might be a time to get in.
Colombia
Due to a strike of truck drivers and a rising tide of labor unrest we are taking profits on half of our recommendation in Columbia.
